THIRD DIVISION

COMMISSIONER OF G.R. No. 146984

INTERNAL REVENUE
Petitioner,
Present:
QUISUMBING,
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
MAGSAYSAY LINES, INC., VELASCO, JR., JJ.
BALIWAG NAVIGATION, INC.,
FIM LIMITED OF THE MARDEN
GROUP (HK) and NATIONAL
DEVELOPMENT COMPANY,
Respondents. Promulgated:

July 28, 2006

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DECISION
TINGA, J.:

The issue in this present petition is whether the sale by the National Development
Company (NDC) of five (5) of its vessels to the private respondents is subject to
value-added tax (VAT) under the National Internal Revenue Code of 1986 (Tax
Code) then prevailing at the time of the sale. The Court of Tax Appeals (CTA) and
the Court of Appeals commonly ruled that the sale is not subject to VAT. We affirm,
though on a more unequivocal rationale than that utilized by the rulings under
review. The fact that the sale was not in the course of the trade or business of NDC
is sufficient in itself to declare the sale as outside the coverage of VAT.

The facts are culled primarily from the ruling of the CTA.

Pursuant to a government program of privatization, NDC decided to sell to

private enterprise all of its shares in its wholly-owned subsidiary the National Marine
Corporation (NMC). The NDC decided to sell in one lot its NMC shares and five (5)
of its ships, which are 3,700 DWT Tween-Decker, Kloeckner type vessels.[1] The
vessels were constructed for the NDC between 1981 and 1984, then initially leased
to Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently,
the vessels were transferred and leased, on a bareboat basis, to the NMC.[2]
The NMC shares and the vessels were offered for public bidding. Among the
stipulated terms and conditions for the public auction was that the winning bidder
was to pay a value added tax of 10% on the value of the vessels. [3] On 3 June 1988,
private respondent Magsaysay Lines, Inc. (Magsaysay Lines) offered to buy the
shares and the vessels for P168,000,000.00. The bid was made by Magsaysay Lines,
purportedly for a new company still to be formed composed of itself, Baliwag
Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong
(collectively, private respondents).[4] The bid was approved by the Committee on
Privatization, and a Notice of Award dated 1 July 1988 was issued to Magsaysay
Lines.

On 28 September 1988, the implementing Contract of Sale was executed between

NDC, on one hand, and Magsaysay Lines, Baliwag Navigation, and FIM Limited,
on the other. Paragraph 11.02 of the contract stipulated that [v]alue-added tax, if any,
shall be for the account of the PURCHASER.[5] Per arrangement, an irrevocable
confirmed Letter of Credit previously filed as bidders bond was accepted by NDC
as security for the payment of VAT, if any. By this time, a formal request for a ruling
on whether or not the sale of the vessels was subject to VAT had already been filed
with the Bureau of Internal Revenue (BIR) by the law firm of Sycip Salazar
Hernandez & Gatmaitan, presumably in behalf of private respondents. Thus, the
parties agreed that should no favorable ruling be received from the BIR, NDC was
authorized to draw on the Letter of Credit upon written demand the amount needed
for the payment of the VAT on the stipulated due date, 20 December 1988.[6]
In January of 1989, private respondents through counsel received VAT Ruling No.
568-88 dated 14 December 1988 from the BIR, holding that the sale of the vessels
was subject to the 10% VAT. The ruling cited the fact that NDC was a VAT-
registered enterprise, and thus its transactions incident to its normal VAT registered
activity of leasing out personal property including sale of its own assets that are
movable, tangible objects which are appropriable or transferable are subject to the
10% [VAT].[7]

Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as
well as VAT Ruling No. 395-88 (dated 18 August 1988), which made a similar
ruling on the sale of the same vessels in response to an inquiry from the Chairman
of the Senate Blue Ribbon Committee. Their motion was denied when the BIR
issued VAT Ruling Nos. 007-89 dated 24 February 1989, reiterating the earlier VAT
rulings. At this point, NDC drew on the Letter of Credit to pay for the VAT, and the
amount of P15,120,000.00 in taxes was paid on 16 March 1989.

On 10 April 1989, private respondents filed an Appeal and Petition for Refund with
the CTA, followed by a Supplemental Petition for Review on 14 July 1989. They
prayed for the reversal of VAT Rulings No. 395-88, 568-88 and 007-89, as well as
the refund of the VAT payment made amounting to P15,120,000.00.[8] The
Commissioner of Internal Revenue (CIR) opposed the petition, first arguing that
private respondents were not the real parties in interest as they were not the
transferors or sellers as contemplated in Sections 99 and 100 of the then Tax Code.
The CIR also squarely defended the VAT rulings holding the sale of the vessels
liable for VAT, especially citing Section 3 of Revenue Regulation No. 5-87 (R.R.
No. 5-87), which provided that [VAT] is imposed on any sale or transactions deemed
sale of taxable goods (including capital goods, irrespective of the date of
acquisition). The CIR argued that the sale of the vessels were among those
transactions deemed sale, as enumerated in Section 4 of R.R. No. 5-87. It seems that
the CIR particularly emphasized Section 4(E)(i) of the Regulation, which classified
change of ownership of business as a circumstance that gave rise to a transaction
deemed sale.

In a Decision dated 27 April 1992, the CTA rejected the CIRs arguments and granted
the petition.[9] The CTA ruled that the sale of a vessel was an isolated transaction,
not done in the ordinary course of NDCs business, and was thus not subject to VAT,
which under Section 99 of the Tax Code, was applied only to sales in the course of
trade or business. The CTA further held that the sale of the vessels could not be
deemed sale, and thus subject to VAT, as the transaction did not fall under the
enumeration of transactions deemed sale as listed either in Section 100(b) of the Tax
Code, or Section 4 of R.R. No. 5-87. Finally, the CTA ruled that any case of doubt
should be resolved in favor of private respondents since Section 99 of the Tax Code
which implemented VAT is not an exemption provision, but a classification
provision which warranted the resolution of doubts in favor of the taxpayer.
 The CIR appealed the CTA Decision to the Court of Appeals,[10]which on 11
March 1997, rendered a Decision reversing the CTA.[11]While the appellate court
agreed that the sale was an isolated transaction, not made in the course of NDCs
regular trade or business, it nonetheless found that the transaction fell within the
classification of those deemed sale under R.R. No. 5-87, since the sale of the vessels
together with the NMC shares brought about a change of ownership in NMC. The
Court of Appeals also applied the principle governing tax exemptions that such
should be strictly construed against the taxpayer, and liberally in favor of the
government.[12]

However, the Court of Appeals reversed itself upon reconsidering the case, through
a Resolution dated 5 February 2001.[13] This time, the appellate court ruled that the
change of ownership of business as contemplated in R.R. No. 5-87 must be a
consequence of the retirement from or cessation of business by the owner of the
goods, as provided for in Section 100 of the Tax Code. The Court of Appeals also
agreed with the CTA that the classification of transactions deemed sale was a
classification statute, and not an exemption statute, thus warranting the resolution of
any doubt in favor of the taxpayer.[14]

To the mind of the Court, the arguments raised in the present petition have already
been adequately discussed and refuted in the rulings assailed before us. Evidently,
the petition should be denied. Yet the Court finds that Section 99 of the Tax Code is
sufficient reason for upholding the refund of VAT payments, and the subsequent
disquisitions by the lower courts on the applicability of Section 100 of the Tax Code
and Section 4 of R.R. No. 5-87 are ultimately irrelevant.

A brief reiteration of the basic principles governing VAT is in order. VAT is

ultimately a tax on consumption, even though it is assessed on many levels of
transactions on the basis of a fixed percentage.[15] It is the end user of consumer
goods or services which ultimately shoulders the tax, as the liability therefrom is
passed on to the end users by the providers of these goods or services[16] who in turn
may credit their own VAT liability (or input VAT) from the VAT payments they
receive from the final consumer (or output VAT).[17]The final purchase by the end
consumer represents the final link in a production chain that itself involves several
transactions and several acts of consumption. The VAT system assures fiscal
adequacy through the collection of taxes on every level of consumption,[18]yet
assuages the manufacturers or providers of goods and services by enabling them to
pass on their respective VAT liabilities to the next link of the chain until finally the
end consumer shoulders the entire tax liability.

Yet VAT is not a singular-minded tax on every transactional level. Its assessment
bears direct relevance to the taxpayers role or link in the production chain. Hence,
as affirmed by Section 99 of the Tax Code and its subsequent incarnations,[19] the
tax is levied only on the sale, barter or exchange of goods or services by persons
who engage in such activities, in the course of trade or business. These
transactions outside the course of trade or business may invariably contribute to the
production chain, but they do so only as a matter of accident or incident. As the sales
of goods or services do not occur within the course of trade or business, the providers
of such goods or services would hardly, if at all, have the opportunity to
appropriately credit any VAT liability as against their own accumulated VAT
collections since the accumulation of output VAT arises in the first place only
through the ordinary course of trade or business.

That the sale of the vessels was not in the ordinary course of trade or business of
NDC was appreciated by both the CTA and the Court of Appeals, the latter doing so
even in its first decision which it eventually reconsidered.[20] We cite with approval
the CTAs explanation on this point:

In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30,

1955 (97 Phil. 992), the term carrying on business does not mean the performance of a
single disconnected act, but means conducting, prosecuting and continuing business by
performing progressively all the acts normally incident thereof; while doing
business conveys the idea of business being done, not from time to time, but all the time.
[J. Aranas, UPDATED NATIONAL INTERNAL REVENUE CODE (WITH
ANNOTATIONS), p. 608-9 (1988)]. Course of business is what is usually done in the
management of trade or business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss.
65, cited in Words & Phrases, Vol. 10, (1984)].

What is clear therefore, based on the aforecited jurisprudence, is that course of

business or doing business connotes regularity of activity. In the instant case, the sale was
an isolated transaction. The sale which was involuntary and made pursuant to the declared
policy of Government for privatization could no longer be repeated or carried on with
regularity. It should be emphasized that the normal VAT-registered activity of NDC is
leasing personal property.[21]
 This finding is confirmed by the Revised Charter [22] of the NDC which bears
no indication that the NDC was created for the primary purpose of selling real
property.[23]

The conclusion that the sale was not in the course of trade or business, which
the CIR does not dispute before this Court,[24]should have definitively settled the
matter. Any sale, barter or exchange of goods or services not in the course of trade
or business is not subject to VAT.

Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No.
5-87 now relied upon by the CIR, is captioned Value-added tax on sale of goods,
and it expressly states that [t]here shall be levied, assessed and collected on every
sale, barter or exchange of goods, a value added tax x x x. Section 100 should be
read in light of Section 99, which lays down the general rule on which persons are
liable for VAT in the first place and on what transaction if at all. It may even be
noted that Section 99 is the very first provision in Title IV of the Tax Code, the Title
that covers VAT in the law. Before any portion of Section 100, or the rest of the law
for that matter, may be applied in order to subject a transaction to VAT, it must first
be satisfied that the taxpayer and transaction involved is liable for VAT in the first
place under Section 99.

It would have been a different matter if Section 100 purported to define the phrase
in the course of trade or business as expressed in Section 99. If that were so,
reference to Section 100 would have been necessary as a means of ascertaining
whether the sale of the vessels was in the course of trade or business, and thus
subject to

VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-
87 elaborate on is not the meaning of in the course of trade or business, but instead
the identification of the transactions which may be deemed as sale. It would become
necessary to ascertain whether under those two provisions the transaction may be
deemed a sale, only if it is settled that the transaction occurred in the course of trade
or business in the first place. If the transaction transpired outside the course of trade
or business, it would be irrelevant for the purpose of determining VAT liability
whether the transaction may be deemed sale, since it anyway is not subject to VAT.

Accordingly, the Court rules that given the undisputed finding that the transaction
in question was not made in the course of trade or business of the seller, NDC that
is, the sale is not subject to VAT pursuant to Section 99 of the Tax Code, no matter
how the said sale may hew to those transactions deemed sale as defined under
Section 100.

In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find
application in this case, the Court finds the discussions offered on this point by the
CTA and the Court of Appeals (in its subsequent Resolution) essentially correct.
Section 4 (E)(i) of R.R. No. 5-87 does classify as among the transactions deemed
sale those involving change of ownership of business. However, Section 4(E) of R.R.
No. 5-87, reflecting Section 100 of the Tax Code, clarifies that such change of
ownership is only an attending circumstance to retirement from or cessation of
business[, ] with respect to all goods on hand [as] of the date of such retirement or
cessation.[25] Indeed, Section 4(E) of R.R. No. 5-87 expressly characterizes the
change of ownership of business as only a circumstance that attends those
transactions deemed sale, which are otherwise stated in the same section.[26]

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.